Academic level – Undergraduate 1-2
Type of paper – Analysis
Topic Title – Business Structures and Their Legal Implications
How do the various legal structures of business, including sole proprietorship, partnership, corporation, and limited liability company, impact the entrepreneur in terms of personal liability, taxation, and the ability to raise capital?
Provide examples and discuss the benefits and drawbacks of each structure.” Your essay should have a clear focus and a well-defined thesis statement.
The legal structure of a business affects the entrepreneur in various ways, determining how the business is taxed, how it can raise capital, and how it protects the entrepreneur from personal liability. There are four main types of business structures: sole proprietorship, partnership, corporation, and limited liability company (LLC). Each type has unique pros and cons that vary depending on the objectives and demands of the entrepreneur.
A sole proprietorship is the most straightforward form of business structure that implies that one individual owns and operates the business. The owner is accountable for all business aspects, including debts, liabilities, and obligations. The income and expenses of the business are incorporated into the owner’s tax return, and the owner pays self-employment tax on the net profit. A sole proprietorship is effortless and affordable to establish, and it guarantees the owner entire authority and flexibility over the business. Nevertheless, a sole proprietorship also jeopardizes the owner to unlimited personal liability, meaning that the owner’s assets can be confiscated to settle the business’s debts or lawsuits (Robinson et al., 2021). Besides, a sole proprietorship has a restricted capacity to raise capital since it cannot distribute shares or issue bonds.
A partnership involves two or more people who concur to share the profits and losses of a business. In a general partnership, all associates have identical privileges and obligations in managing the business, and they are personally responsible for the debts and responsibilities of the business. In a limited partnership, there is at least one general associate with absolute liability and one or more limited partners with limited liability and involvement in the business. According to Robinson et al. (2021), a partnership also benefits from pass-through taxation, meaning that the income and expenses of the business are incorporated into each partner’s tax return, and each member pays tax on their stake in the profit. Other than that, a partnership entails risks and challenges, such as potential conflicts among partners, difficulty withdrawing from the partnership, and lack of continuity if a partner leaves.
A corporation is a business structure that creates a separate legal entity from its owners. It can own property, enter into contracts, sue and be sued, and issue shares of stock to raise capital (Robinson et al., 2021). A corporation is owned by shareholders who elect a board of directors to govern the business operations. This business structure offers several advantages to the entrepreneur, such as limited liability for shareholders, perpetual existence regardless of changes in ownership or management, ease of transferring ownership by selling shares of stock, and access to various sources of capital from investors and lenders (Robinson et al., 2021). However, a corporation also involves some drawbacks, such as complex and costly formation and maintenance requirements, strict regulations and compliance issues, potential conflicts between shareholders and managers, and loss of control by founders or owners.
A limited liability company (LLC) unites aspects of both corporation and a sole proprietorship or a partnership. An LLC is owned by members who can be individuals or other entities. An LLC also has a choice in taxation, meaning it can be taxed as a pass-through like a sole proprietorship or a partnership or as a separate thing like a corporation (Lidstone, 2021). Furthermore, a limited liability company allows choice in management and operation, meaning it can have any operations that fit its needs. An LLC also has some disadvantages, such as varying state laws and guidelines about its establishment and operation, difficulties obtaining funds from investors, and lack of uniformity in legal recognition across different jurisdictions.
To summarize, choosing a legal structure for a business is a crucial decision that affects various aspects of the entrepreneur’s venture. Each legal structure has pros and cons that must be weighed carefully according to the entrepreneur’s goals and preferences. There is no unified solution for every business because entrepreneur should consider their specific situation and consult with legal and tax professionals before making their choice.
Lidstone, H. K. (2021). LLC or Inc.? entity selection for a small business. Social Science Research Network. https://doi.org/10.2139/ssrn.3938182
Robinson, Dr. L. J. R., Hanson, Dr. S. D., & Black, Dr. J. R. (2021). Financial management for small businesses: Financial statements & present value models. Independently published (October 5, 2021).